Amicus Curiae Brief — UNUM Life Ins. Co. of America v. Ward

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No. 97-1868

In The

Supreme Court of the United States

October Term, 1998

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UNUM LIFE INSURANCE COMPANY OF AMERICA,

Petitioner,

v.

JOHN E. WARD,

Respondent.

S

On Writ Of Certiorari To The

United States Court Of Appeals

For The Ninth Circuit

.

MOTION FOR LEAVE TO FILE BRIEF

FOR THE ASSOCIATION OF CALIFORNIA

LIFE AND HEALTH INSURANCE COMPANIES

AS AMICUS CURIAE AND BRIEF AS

AMICUS CURIAE IN SUPPORT OF PETITIONER

°

Bravery E. WENGER James H. FLemMinc

Counsel and Secretary Counsel of Record

ASSOCIATION OF CALIFORNIA FLemMING & Puiturs LLP

Lire AND HEALTH 1340 Treat Blvd., Ste. 630

INSURANCE COMPANIES Walnut Creek, CA 94596-2101

1201 K Street Telephone: (925) 296-2600

Sacramento, CA 95814 Facsimile: (926) 296-2625

Telephone: (916) 442-3648

Facsimile: (916) 442-1730

Counsel for the Association of California

Life and Health Insurance Companies

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

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MOTION FOR LEAVE TO FILE BRIEF FOR

THE ASSOCIATION OF CALIFORNIA LIFE AND

HEALTH INSURANCE COMPANIES AS

AMICUS CURIAE AND BRIEF AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

Pursuant to Rule 37.3 of the Rules of this Court, the

Association of California Life and Health Insurance Com-

panies (“ACLHIC”) respectfully requests leave to file the

accompanying brief as amicus curiae in support of peti-

tioner. Counsel for petitioner has consented to the filing

of this amicus curiae brief. Counsel for respondent has not

consented to the filing of this brief.

ACLHIC is a nonprofit association whose members

are domestic California life and health insurance com-

panies and foreign life and health insurance companies

which do business in California. One of the primary

purposes of ACLHIC is to represent the interests of its

members and their policyholders in substantial public

policy matters which affect them. ACLHIC has partici-

pated as amicus curiae in other federal cases for this

purpose. ACLHIC has a duty to promote the solvency

and efficiency of its members and the soundness of the

products they issue.

In the instant case, ACLHIC has a substantial interest

in insuring the efficient administration of life, disability

and health insurance policies issued to employee benefit

plans subject to the Employee Retirement Income Secu-

rity Act (“ERISA”), 29 U.S.C. Sections 1001, et seq. The

inefficient interposition in the administration of such

plans of disparate state common law rules of statewide,

general application, such as the California notice-preju-

dice rule, is contrary to the express terms of ERISA and to

the prior decisions of this Court. The application of such

rules to ERISA plans generally will result in inefficient

state-by-state benefit determinations, to the detriment of

participants, beneficiaries, plan sponsors and service pro-

viders such as the members of ACLHIC. Moreover, the

particular common law doctrine in question here — the

California notice-prejudice rule - would unpredictably

extend liability for tardy claims, prevent the reliable clos-

ing of annual accounting periods and provide disparate

benefits to plan beneficiaries who reside in different

states.

ACLHIC is familiar with the questions involved in

the case and the scope of their presentation. ACLHIC

believes that additional argument should be presented on

one aspect of the legal analysis of the decision below.

While petitioner has fully analyzed and briefed the legal

issues presented, additional briefing by ACLHIC will

assist the Court by demonstrating a significant error of

law in the decision below.

It is therefore respectfully requested that the motion

of ACLHIC for leave to file the attached brief as amicus

curiae be granted.

Respectfully submitted,

James H. FieMinc

Counsel of Record

Fieminc & Pups LLP

1340 Treat Boulevard, Suite 630

Walnut Creek, CA 94596

Attorney for Amicus Curiae

Association of California Life

and Health Insurance Companies

December 1, 1998

TABLE OF CONTENTS

Page

INTEREST OF THE AMICUS ...............ceeeees 1

REASONS POR REVERSAL............00--ceseeeee 2

Il. “Notice-Prejudice” is a Rule of General Applica-

AbD dab aes wes oy oc égdone’s duddbd'esce coe ee 2

Il. The Application of Notice-Prejudice Undermines

the Requirement of Adherence to Written Plan

Documents and Opens the Door to Disparate

CEP Aa eb avs bonded eedektetseccovctevers 8

TT MUl ete owscdisesakdendsca’scccees< 10

TABLE OF AUTHORITIES

Page

Cases

Clemmer v. Hartford Ins. Co., 22 Cal. 3d 865, 151

Cal. Rptr. 285, 587 P.2d 1098 (1978)................ 7

Cisneros v. UNUM Life Ins. Co. of America, 134 F.3d

COP Ge Gas Ms Kes sb vicace connsateteedsan 2, 6, 7, 8

Conservatorship of Rand, 49 Cal. App. 4th 835, 57

Ce; CEE. Zk Be CPOE < 00s dncyctynendeadue sues eee 4

Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1

GOUT <0 n06 eo ddrinatsndvntesdencsmadennastaasusnete 9

Industrial Asphalt, Inc. v. Garrett Corp., 180 Cal.

App. 3d 1001, 226 Cal. Rptr. 17 (1986)............. 4

In re David C., 152 Cal. App. 3d 1189, 20 Cal. Rptr.

SED GOED + cccccvcbocwncsdnabavdduduadddasnnsst odes 4

Jersey Shore State Bank v. U.S., 479 U.S. 442 (1986) ..... 5

Johnson-Stovall v. Superior Court, 17 Cal. App. 4th

808, 21 Cal. Rptr. 2d 494 (1993). ..........ccceeeeee 5

Lum v. Mission Inn Foundation, Inc., 180 Cal. App.

3G 967, 226 Cal. Rpts. 2 (IGGB)..... ccccccccccvceses 5

Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

Fan GOED «54.60 saccsnvuse ciphSrtarhaedagbubenn 12,3

People v. Carrera, 49 Cal. 3d 291, 261 Cal. Rptr. 348,

777 P.2d 121 (1989), cert. denied, 495 U.S. 911

GRRE so vececccececeteduawebaweteh ties thi ees 4

People v. Howard, 44 Cal. 3d 375, 243 Cal. Rptr. 842,

749 P.2d 279, cert. denied, 488 U.S. 871 (1988)....... 4

People v. Mayfield, 14 Cal. 4th 668, 60 Cal. Rptr. 2d

1, 928 P.2d 485, cert. denied, 118 S. Ct. 116 (1997)..... 5

iii

TABLE OF AUTHORITIES —- Continued

Page

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)

Ras eee EO babes itWobr eens ests Chcdeneee 1, 2, 3, 6, 7, 9

Pioneer Investment Services v. Brunswick Associates

Ltd. Partnership, 507 U.S. 380 (1993)................ 5

Pohl v. National Benefits Consultants, Inc., 956 F.2d

a Se ae ee ee oe ella nce es 8

Putnam v. Cla 3 Cal. App. 4th 542, 5 Cal. Rptr.

2d 25 (1999). > SI a PRS SS AN a A a 5

Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal.

App. 4th 715, 15 Cal. Rptr. 2d 815 (1993).......... 7

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119

EG te One Rp ye a tl aD apt aha PS aa 3

STATUTES

er ee Retirement Income Security Act .

A”), Section 514, 29 U.S.C. Section 1144..... 2

OrTHER AUTHORITIES

Restatement (Second) of Contracts § 229............. 4

INTEREST OF THE AMICUS

The Association of California Life and Health Insur-

ance Companies (“ACLHIC”) is a nonprofit association

whose members are domestic California life and health

insurance companies and foreign life and health insur-

ance companies which do business in California.’ Its

interest in the issues presented by the petition is substan-

tial and directly affects its members for the reasons set

forth in the foregoing motion for leave to file this brief.

Petitioner has consented to the filing of this brief.

Respondent has not consented.

The Ninth Circuit’s decision in this case conflicts

with Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

724, 744 (1985), and Pilot Life Ins. Co. v. Dedeaux, 481 US.

41, 48-50 (1987), because, without analysis or explanation,

it applies a common law doctrine of general application

as if it were a law specifically directed at the insurance

industry. The result is to invalidate ERISA benefit plan

rules requiring the timely submission of claims and to

complicate the administration and increase the expense of

such plans, to the ultimate detriment of the plans and

their participants.

ACLHIC’s members and the plans they serve, as well

as the plans’ beneficiaries, have a substantial interest in

the timely submission and adjudication of benefit claims.

Contrary to the orderly administration of benefit plans,

' Pursuant to Rule 37.6, amicus ACLHIC states that no

counsel for a party has written this brief in whole or in part and

that no person or entity, other than amicus, or its counsel, has

made a monetary contribution to the preparation or submission

of this brief.

permitting late claims by application of the California

notice-prejudice rule would open up closed accounting

periods and render unreliable the financial results for

such closed periods. Benefit plans and their insurers alike

will necessarily be obliged to alter their financial plan-

ning because the results for a given period will always be

in doubt and subject to revision by the resuscitation of

untimely claims. Moreover, applying such judge-made

doctrines to overrule the clear terms of written benefit

plans will undermine the clarity and certainty of the

plans in contravention of the expressed intention of Con-

gress.

°

REASONS FOR REVERSAL

I. “Notice-Prejudice” is a Rule of General Application.

In this action, the Ninth Circuit correctly held that

California's common law notice-prejudice rule is within

the scope of ERISA preemption as a state law which

“related to” an employee benefit plan. ERISA Section

514(a), 29 U.S.C. Section 1144(a). The Ninth Circuit erred,

however, in its conclusion that the notice-prejudice rule is

a state law regulating insurance which could be “saved”

from ERISA preemption under ERISA Section

514(b)(2)(a), 29 U.S.C. Section 1144(b)(2)(a). In this deci-

sion, the Ninth Circuit followed its earlier and similarly

erroneous decision in Cisneros v. UNUM Life Ins. Co. of

America, 134 F.3d 939 (9th Cir. 1998).

In Cisneros, the Ninth Circuit analyzed Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. 724, 744 (1985), and

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48-50 (1987),

acknowledging that a state law is only saved from ERISA

preemption if the law is “specifically directed” at the

insurance industry and if it “regulates insurance”, 134

F.3d at 944-945.

The Ninth Circuit failed, however, correctly to apply

the common sense test of Dedeaux in reaching the erro-

neous conclusion that such a law must be “specifically

directed” at the insurance industry. Indeed, the Metro-

politan Life decision explained that, to be part of the

business of insurance, the practice in question must be

“limited to entities within the insurance industry”. Metro-

politan Life Ins. Co. v. Massachusetts, 471 U.S. at 743. Metro-

politan Life in turn relied upon Union Labor Life Ins. Co. v.

Pireno, 458 U.S. 119 (1982), where the Court refused to

accord McCarran-Ferguson protection to a claim adjudi-

cation practice, in part because it involved parties outside

the insurance industry. Since the goal of Congress was,

this Court said, “to protect ‘intra-industry cooperation’ in

the underwriting of risks”, a practice which involved

non-insurance entities “can hardly be said to lie at the

center of that legislative concern”. Pireno, 458 U.S. at 133.

On examination, it will readily be seen that the

notice-prejudice rule is neither “specifically directed” at

the insurance industry nor “limited to entities within the

insurance industry”. Instead, the notice-prejudice rule is

one of common application to a wide variety of situations

and parties outside the insurance industry, like the prac-

tice addressed in Pireno, supra.

The notice-prejudice rule simply requires that preju-

dice must result before failure to give a required notice

will work a forfeiture. In short, harmless breaches will be

ignored. A broad expression of this commonplace doc-

trine may be found in the Restatement (Second) of Con-

tracts, Section 229, as follows:

To the extent that the non-occurrence of a condi-

tion would cause disproportionate forfeiture, a

court may excuse the non-occurrence of that

condition unless its occurrence was a material

part of the agreed exchange.

Indeed, the requirement that prejudice must result before

a failure to perform a contractual condition or to give a

required notice will work a forfeiture is a common doc-

trine in the law of California and has been applied in a

wide variety of civil, criminal, family and commercial

matters. See People v. Carrera, 49 Cal. 3d 291, 261 Cal. Rptr.

348, 777 P.2d 121 (1989), cert. denied, 495 U.S. 911 (1990)

(failure to give notice of testimony in aggravation of a

capital murder sentence harmless where defendant was

not prejudiced by lack of notice); Conservatorship of Rand,

49 Cal. App. 4th 835, 57 Cal. Rptr. 2d 119 (1996) (failure to

give notice of citation to proposed conservatee harmless

where no prejudice resulted); People v. Howard, 44 Cal. 3d

375, 243 Cal. Rptr. 842, 749 P.2d 279, cert. denied, 488 U.S.

871 (1988) (untimely notice of evidence to be used in

penalty phase of capital murder prosecution harmless

where no prejudice shown); In re David C., 152 Cal. App.

3d 1189, 20 Cal. Rptr. 115 (1984) (failure to give adequate

notice of termination of custody of minor child harmless

where no prejudice shown); Industrial Asphalt, Inc. v. Gar-

rett Corp., 180 Cal. App. 3d 1001, 226 Cal. Rptr. 17 (1986)

(failure to serve statutory notice of mechanic's lien claim

ineffective to defeat lien where no prejudice resulted).

Indeed, if anything, notice-prejudice is merely a

branch of the broad doctrine of harmless error: in every

manner of case and circumstance, excepting only jurisdic-

tional defects, courts disregard irregularities and infor-

malities which do not result in substantial prejudice.

Thus, California courts apply the harmless error doctrine

to excuse the failure timely to post jury fees where no

prejudice is proven. Johnson-Stovall v. Superior Court, 17

Cal. App. 4th 808, 21 Cal. Rptr. 2d 494 (1993). Likewise,

California ignores the failure to give proper and advis-

able jury instructions concerning criminal negligence

where the failure would not have prejudiced the defen-

dant, given a jury finding of guilt of first degree premedi-

tated and deliberate murder. People v. Mayfield, 14 Cal. 4th

668, 60 Cal. Rptr. 2d 1, 928 P.2d 485, cert. denied, 118 S. Ct.

116 (1997). The failure to make timely service of a civil

action has similarly been excused absent a finding of

prejudice. Putnam v. Clague, 3 Cal. App. 4th 542, 5 Cal.

Rptr. 2d 25 (1992). Likewise, informalities in the proof of

service of documents are ignored where actual service

occurred and no prejudice resulted. Lum v. Mission Inn

Foundation, Inc., 180 Cal. App. 3d 967, 226 Cal. Rptr. 22

(1986).

This Court, too, has applied the notice-prejudice rule,

and in contexts far removed from the insurance industry.

See Pioneer Investment Services v. Brunswick Associates Ltd.

Partnership, 507 U.S. 380 (1993) (tardy filing of bankruptcy

proofs of claim excused where debtor was not prejudiced

by delay); Jersey Shore State Bank v. U.S., 479 U.S. 442

(1986) (third party lender not unfairly prejudiced by gov-

ernment failure to give notice of tax claim).

In Cisneros, supra, the Ninth Circuit assumed without

analysis that the notice-prejudice rule is directed speci-

fically at the insurance industry. The only authority cited

by the Ninth Circuit for the conclusion that the notice-

prejudice rule is directed specifically at the insurance

industry and is applicable only to insurance contracts is

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 50 (1987).

Dedeaux, of course, only sets forth the standard that to be

regarded as a law which regulates insurance, it must not

only have an impact on the insurance industry but must

be specifically directed toward that industry. Dedeaux, by

itself, lends no support for the conclusion that this partic-

ular rule is specifically directed at the insurance industry.

And while the Ninth Circuit cited Dedeaux, it failed to

pursue the careful analytical approach of Dedeaux in delv-

ing in detail into the jurisprudential history of the doc-

trine in question, which in Dedeaux was the availability of

punitive damages under Mississippi law. In Dedeaux, this

Court concluded that:

“Even though the Mississippi Supreme Court

has identified its law of bad faith with the insur-

ance industry, the roots of this law are firmly

planted in the general principles of Mississippi

tort and contract law. Any breach of contract,

and not merely breach of an insurance contract,

may lead to liability for punitive damages under

Mississippi law.” 481 U.S. 41 at 50.

The same is manifestly true here. The California courts

have identified the notice-prejudice law with the insur-

ance industry, but its roots are firmly planted in the

general principles of California jurisprudence, both civil

and criminal. The doctrine of excuse of minor breach

under the rubric “notice-prejudice” has been identified

—

with and applied to the insurance industry, but the self-

same doctrine has also been applied in a myriad of non-

insurance contexts, just as the punitive damages law of

Mississippi had been applied to many non-insurers. The

Ninth Circuit did not attempt, nor could it, to show that

the common law doctrine to excuse minor, non-prejudi-

cial contract breaches is one specifically directed toward

that industry.

Cases applying the notice-prejudice doctrine to the

insurance industry may be found and are cited in the

Ninth Circuit opinion in Cisneros (Shell Oil Co. v. Swiss

Ins. Co., 12 Cal. App. 4th 715, 15 Cal. Rptr. 2d 815, 845

(1993); and Clemmer v. Hartford Ins. Co., 22 Cal. 3d 865,

151 Cal. Rptr. 285, 587 P.2d 1098, 1106-1107 (1978)), but

such a demonstration is unavailing to answer the essen-

tial inquiry of whether the rule is specifically directed

toward the insurance industry. What must instead be

demonstrated is that the doctrine in question applies only

to insurers and not to non-insurance entities. It was evi-

dence that the claims practice in Pireno, supra, involved

non-insurers which, in part, disqualified Union Labor

Life from McCarran-Ferguson protection and it was evi-

dence that the Mississippi punitive damage law applied

to non-insurers which required its preemption in

Dedeaux, supra. Citing instances where a rule of general

applicability has been applied to the insurance industry

does not make that rule specifically directed at that

industry any more than the previous application of puni-

tive damage concepts to insurers made Mississippi's

punitive damage law one directed specifically at the

insurance industry. The Ninth Circuit’s reliance on cases

showing that notice-prejudice applies to the insurance

industry was misplaced because the same do nothing to

establish that the rule is limited to that industry. As

abundantly demonstrated above, there is no such limita-

tion in California or elsewhere. Notice-prejudice is

instead commonly applied to a wide variety of parties

and legal settings.

Il. The Application of Notice-Prejudice Undermines

the Requirement of Adherence to Written Plan Doc-

uments and Opens the Door to Disparate Regula-

tion.

Judge Posner of the Seventh Circuit cogently

observed that “[one] of ERISA’s purposes is to protect the

financial integrity of pension and welfare plans by con-

fining benefits to the terms of the plans as written. .. . ”

Pohl v. National Benefits Consultants, Inc., 956 F.2d 126 (7th

Cir. 1992). The adoption of notice-prejudice, no less than

the recognition of the oral coverage representations of

which Judge Posner wrote, would undermine this pur-

pose of ERISA and impair the financial integrity of pen-

sion and welfare plans. This is all the more true because,

as the Ninth Circuit recognized in the predecessor to this

case, Cisneros v. UNUM Life Ins. Co., supra, 134 F.3d at 947,

there is no uniformity in the methods of applying the

notice-prejudice doctrines of the various states. Plan

administrators and their insurers, then, will be tasked to

award different benefits to different plan beneficiaries, all

in ways unpredictable from the terms of the plan docu-

ment. Further, because the accounting period for any plan

can never be considered closed if the financial results

may be reopened for late claims which have been revived

by notice-prejudice, plans and their insurers will be

unable accurately to determine the costs for a given

period and the appropriate rate adjustments for ensuing

ones.

In addition, the faulty reasoning of the Ninth Cir-

cuit’s decision will permit disparate state-by-state rulings

on topics far beyond notice-prejudice. Any common law

doctrine which has been applied to the insurance indus-

try may, by application of the Ninth Circuit's “analysis”,

be regarded as one directed at the insurance industry and

saved from preemption.?

The inevitable result of the Ninth Circuit approach is

to save from preemption laws sometimes applied to the

insurance industry, rather than applied only to the insur-

ance industry. This logic will open the floodgate of dispa-

rate state regulation and usher in the “patchwork scheme

of regulation” which ERISA’s broad preemption provi-

sion was enacted to eliminate. See Fort Halifax Packing Co.

v. Coyne, 482 U.S. 1, 10 (1987). Instead of attaining

ERISA’s manifest goal of increased efficiency and reduced

costs, plans and plan administrators will be required to

pay late claims and, more importantly, to administer

plans separately according to the law of each state. This

will in turn reduce the affordability of benefit plans and

increase the likelihood that benefits will be withdrawn or

not offered at all.

2 It is ironic that the Ninth Circuit’s approach would

demonstrate that the Mississippi law of punitive damages is

specifically directed at the insurance industry —- after all, it has

been repeatedly applied in insurance cases. Dedeaux, supra, is a

complete answer to this fallacy.

10

CONCLUSION

In enacting ERISA, Congress intended to encourage

the provision of benefits in a cost-effective and efficient

manner. As an integral part of that effort, Congress

broadly preempted state law. This Court has enforced the

determination of Congress that only laws specifically

directed at the insurance industry may escape preemption.

The law in question here is not so restricted but has been

applied in many non-insurance cases and contexts. More

importantly, the decision below was reached not by show-

ing that the notice-prejudice doctrine had been applied

only to the insurance industry but only that it had some-

times been so applied. To so lower the preemption bar

would mean that any law ever applied to an insurer would

escape preemption. The entire salutary purpose of Con-

gress in adopting preemption would effectively be

thwarted and plans would henceforth be subject to a

scheme of patchwork, state-by-state regulation.

The Ninth Circuit’s decision should be reversed to

advance the goals of Congress to promote efficient, nation-

wide standards of plan administration and to preserve the

availability of plan benefits for plan beneficiaries.

Respectfully submitted,

James H. FLemMinc

Counsel of Record

FiemMinc & Puiturs LLP

1340 Treat Boulevard, Suite 630

Walnut Creek, CA 94596

Attorney for Amicus Curiae

Association of California Life

and Health Insurance Companies

December 1, 1998